Individual investors have always had a soft spot for cheap stocks to buy, but get scared away because traditional Wall Street dogma would have you believe that these stocks are too speculative and dangerous for most individuals.
But cheap stocks can be among the best stocks to buy because they bring several advantages to a portfolio.
For starters, if you're buying a quality low-priced stock, you're getting high value for a discount. That's an obvious benefit.
There is also a not-so-obvious benefit...
Large institutional investors such as pension funds and some mutual funds are prohibited from buying stocks that trade below $5. As stocks slip below that price, analysts often stop covering the company due to a lack of interest from larger investors.
The lack of analyst coverage gives you a chance to buy before the stock comes to the attention of large institutional buyers. With cheap stocks, investors are less likely to be trading against the high frequency and short-term traders who need higher-priced, more liquid stocks to conduct their routine business.
Another note about cheap stocks: Hunting for cheap stocks to buy will often take investors to foreign companies' stocks trading in the United States.
Some investors avoid these shares - but you shouldn't. There are very profitable and affordable opportunities in this space. They can also offer a nice balance in your portfolio to shares of U.S. companies that haven't tapped into overseas economic growth.
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Using the widely available web-based stock screeners, an investor can quickly compile a list of international low-priced stocks that trade at discounted valuations and have outstanding long-term potential.
I put together a couple cheap stocks to buy now that are both under $5, are benefiting from economic recovery, and have more than 4% dividend yield...
Cheap Stocks to Buy: AWX to Draw Steady Earnings Growth
One such company is Alumina Limited (NYSE ADR: AWC), an Australian aluminum company.
Alumina, which mines and refines aluminum, operates eight refineries and two aluminum smelters and owns or has interest in seven mining operations. It has a shipping operation that transports aluminum-related raw materials.
Alumina has a 40% stake in a joint venture with Alcoa (NYSE: AA), Alcoa World Alumina. Aluminum prices have been falling in the face of weak global demand, and inventories have piled up over the past couple of years. But as excess inventory is pared down, aluminum companies are stocks to buy now. These companies will see their bottom line and stock price increase fairly rapidly.
Along with other global aluminum producers, Alumina has been reducing capacity and lowering its cost structure by closing unprofitable facilities.
The company also sold stock earlier this year and used the proceeds to pay down debt levels and reduce interest expense. This reduced cost structure will add to the company's earnings growth potential when the markets do recover.
The few analysts who watch Alumina estimate that earnings should average gains of 15% annually over the next five years - but its stock could soar much higher.
Now Alumina stock is trading at 90% of book value, so the growth potential does not appear to be reflected in the current stock price. Alumina looks like a bargain stock that could easily double over the next five years.
Cheap Stocks to Buy Now: Teekay Tankers Poised to Soar
Teekay Tankers Ltd. (NYSE: TNK) is another cheap foreign stock to buy now that appears to have enormous recovery potential over the next few years.
The Bermuda-based company has a fleet of 27 double-hulled vessels of various sizes and has seen its stock price decline as the shipping industry suffered from overcapacity and a weak economy. It's among the ideal shipping stocks to buy as the global economy improves.
The recovering economy should help increase oil demand and the need for shipping crude oil and refined products worldwide. Overcapacity is a rampant problem in the shipping industry, but some older vessels are being scrapped, and new orders have slowed. Eventually the overcapacity problem should ease.
However, shares of Teekay Tankers are priced in a way that ignores the likelihood of improved capacity. The stock trades at just 80% of book value and is down more than 30% over the past year.
Although there are very few analysts that follow the stock, those that do think it will turn the corner next year and report profits for 2014. The company has paid a dividend for 22 straight quarters now, and the shares yield 4.38% at the current price.
TNK traded at $12 before the global recession set in, and a recovery to even half that amount over the next few years would double the money of those who purchased the stock now.
For another great bargain stock to buy that costs just a little more, check out The Best Stock Under $10?
About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.